Many topics are discussed on social media these days, everyone has an opinion on something and would love to be taken as an authority (even when they aren’t) over a niche. Finance and economic discourse aren’t spared which is why you need to be careful about your information source before taking business decisions.
A new study from Greenwich Associates reveals that almost 80% of institutional investors use social media as part of their regular workflow and approximately 30% of these investors say information obtained through social media has directly influenced an investment recommendation or decision.
It’s not unusual to feel pressured to make financial decisions especially when it’s a popular opinion on social media. Unfortunately, the popular opinions aren’t always the best ones.
In this article, we will discuss how social media influences investment decisions and how it can lead to failure
How Social Media Influences Investment Decisions
Potential founders/investors continue to fall, victim of bad markets, because they made decisions based on their emotions. As an investor, it is essential to manage the behavioural impulses of emotional buying and selling that can come from social media trends about the market’s ups and downs.
Many investors end up venturing into investments at market tops and selling at the bottoms because it is not uncommon to get entangled in media hype or fear which usually results in buying investments at peaks and selling during the valleys of the cycle.
How to Avoid Emotion-driven Investments
Here are factors that drive investors to make bad decisions but you’ll also learn how to cope with these factors seeing as they are mostly unavoidable.
Market Condition
The crypto market is one that is subject to many external factors. In recent times, the crypto market has seen a winter period and is still dealing with that. During bull markets, the typical investor sees market opportunities and is driven to commit their finances to it, such excitement might lead the investor to try to gain profits from investments due to favourable market conditions.
In contrast, bear markets occur when the market experiences a long-term decline. Investors tend to have negative sentiments during this period. Many would shy away from investing because bearish markets are marked by fear, however, this period can also come with some good news for investors that can take risks.
Many factors such as war, and economic policies amongst others can affect the market performance so it’s best to carry out adequate research and trust your instincts during bearish markets. Ensure that your decision is always fuelled by facts and not hearsays.
The Time Factor
Many market participants often buy at the top and sell at the bottom by historical money flow analysis. Money flow analysis looks at the net flow of funds for mutual funds and often shows that, when markets are hitting peaks or valleys, buying or selling is at its highest.
Market anomalies like a crisis can be useful time periods for observation because investors withdraw money from the market and money flows to mutual funds turns negative. The net fund outflows peaked at the market bottom and, as is typical for market bottoms, the selling created overly discounted investments, which eventually formed the basis for a turning point and the market’s next ascent upward.
Portfolio Diversification
Diversification, which is the process of buying an array of investments rather than just one or two securities, can also help diminish the emotional response to market volatility. After all, there are only a handful of times in history when all markets have moved in unison and diversification provided little protection. In normal market cycles, using a diversification strategy provides an element of protection because losses in some investments are offset by gains in others.
Diversifying your portfolio can take many forms. You could decide to invest in different industries, different geographies, and even hedging with alternative investments like real estate and private equity. Different market conditions favour different investment groups which means you get protection from your assets and investments regardless of the market conditions.
In Summary
It’s important to learn how to tune out the noise from social media. Get your facts right, and study the trends in different sectors before you commit your money to any investment. It’s easy to say you won’t invest with your emotions but you will need to be deliberate about not giving into greed or overselling in panic.
Understand your own risk tolerance and the risks of your investments and you’ll be able to get a hang of making decisions. Active understanding of the markets and what forces are driving bullish and bearish trends is vital as well.
Overall, a well-defined investment strategy and staying the course through market volatility often results in the best long-term performance returns.
